When it comes to the coronavirus, retailers have had to face a host of new challenges. Now that factories are coming back online in China, stores must adjust to how consumers are responding to the spread of the contagion, which the World Health Organization declared a global pandemic on Wednesday.
While supply was initially the concern, it may be a moot point if there’s little to no demand. “The demand piece is tricky,” said Per Hong, a senior partner in the operations practice of management consulting firm Kearney.
Although purchases of specific products such as hand sanitizer, bottled water and toilet paper are increasing, even selling out at some locations, the desire for discretionary items is declining. Events are also being canceled, and consumers are beginning to work from home en masse, as well as avoiding public places such as restaurants and theaters.
“The only products that will do better are some staples,” said Sucharita Kodali, principal analyst at Forrester. “Only some shelves at Walmart are empty—pasta has been ransacked, but oddly pasta sauce is full. Tea bags seem to be gone. But there’s plenty of Advil and toothpaste. It’s all very strange.”
By Thursday, numerous accounts of empty shelves were reported at retailers ranging from Costco to Target and BJ’s Wholesale Club. But spikes in sales of essentials in the short term are likely to result in shoppers buying less of those products in the future, Hong said, as consumers use their stockpiles.
On the other hand, brands such as Ralph Lauren and Nike are lowering their sales guidance figures, Hong pointed out. Even distillers such as Diageo and Brown-Forman are warning investors about future performance because of lower consumption of liquor at restaurants and bars.
“Travel, hospitality, luxury, restaurants and, yes, discretionary purchases will all do poorly until coronavirus fears subside, the market picks up, and uncertainty is less prevalent,” Kodali said.
Accordingly, don’t expect a shortage of footwear, apparel or toys, said Andrea Weiss, CEO of retail consulting network The O Alliance. “Maybe Nike runs out of a style,” she interjected, but otherwise there remains plenty of inventory.
One area of concern is the supply of generic pharmaceuticals, Weiss noted.
For now, the extent of demand in the longer term is unknown, she said, likening the current impact of the coronavirus to a natural disaster such as a hurricane.
Uncertainty is the new normal
Part of the conundrum is that much remains unknown about the coronavirus, and much is still being learned.
“It’s all fluid. There are no shortage of opinions, but we have a dearth of facts. The closest parallel is Y2K, but that was much ado about nothing,” Kodali said. “Maybe the virus will be better than expected, maybe it will be worse. Who really knows?”
While declaring the coronavirus a global pandemic, the WHO has found it can be controlled with the right policies. However, patients in China who were discharged after recovering from COVID-19, the pneumonia-like disease caused by coronavirus, later tested positive for it.
In the U.S., meanwhile, there are concerns about the response of the Trump administration and the Centers for Disease Control, such as the slow rollout of testing for the virus.
Apart from how to keep people healthy, key economic questions remain unanswered as well, such as whether the plummeting stock market or a drop in consumer spending, which accounts for 70% of the economy, trigger a recession? “The strength of the economy depends on consumption,” Hong said.
Major indices, namely the Dow Jones Industrial Average, are deep in the red. By the close of trading Thursday, the Dow alone was down more than 2,300 points, unmoved by rate cuts by many central banks.
“Luxury also suffers when the stock market crashes, so there are a lot of factors there, not the least of which is supply and demand from Chinese shoppers,” Kodali said.
These kinds of questions become even more complicated when factoring in some economists’ view that both the markets and the economy were already primed for a correction, and that a collapse in the stock market alone could lead to a recession.
The volatility in equities is also spilling over into the debt-financing markets, a deadly development for distressed companies, and particularly retailers.
The supply side has begun to recover
There is consensus among manufacturing sources contacted by Adweek that factories in China are about two to three weeks behind their normal production schedules, and that summer deliveries for consumer products such as apparel and footwear will be about a month late.
In that vein, China is actively pursuing policies not only to control the outbreak, but also to stabilize the export market in a slow, managed resumption of trade, Hong said.
Retailers that Melissa Gonzalez, CEO at experiential retail strategy firm at The Lionesque Group, has spoken to say their factories in China are at about 60% capacity.
In some cases, companies are finding manufacturers in the U.S. that can compensate for some of the falloff in production, Gonzalez said, noting that these types of vendors are getting “slammed.” She said it will interesting to see how much of the slack domestic factories can pick up.
The slow down in manufacturing is something that retailers, so far, have adjusted for, since factories were already closed for the Chinese New Year. Stores built up inventories not only in anticipation of the holiday, but also because of the ongoing dispute between the U.S. and China over trade and tariffs.
Late summer deliveries, however, will likely hurt margins, because that leaves less time to sell items at close to full price. “If summer goods are late, meaning one month, that will be costly,” a source who works directly with Chinese manufacturers told Adweek.
“Seasonal items [have] a very short window to sell,” the source said. Retailers begin offering summer goods for sale after May, meaning they would be “marking it down when people need it the most.”
“I do believe most factories in Asia will do everything to make these shipments: more production shifts, discounts and even airing goods,” the source added. “Once they are stuck with the goods, the value becomes so diminished.”
According to the Institute for Supply Management, 75% of U.S. companies say their supply chains have been affected because of coronavirus-related transportation restrictions, with that disruption rippling outward. “There’s no single industry not impacted on some level,” Hong said.
But a number of brands, while affected, are navigating the disruption.
For example, about 30% of DTC menswear brand Mack Weldon’s products are sourced in China, said CEO Brian Berger. He said the factories that produce his brand’s goods are up and running, and the company has determined that most of its product line is not at risk. Mack Weldon also has plenty of supply, he said.
“This is a dynamic situation, and the global ramifications are still not fully known,” said Tarang Amin, CEO of cosmetics brand e.l.f.
While the company’s sales are primarily in the U.S., its supply chain is largely in China. Its offices and suppliers’ facilities in China are operating, Amin said, revealing that the company has shipped more than 20 containers over the last three weeks. “We already shipped product for annual spring resets at our major national retailers,” he said.
In fact, recovery is about 90% over the past week, depending on the facility, a figure that will improve in the coming weeks, Amin noted.
Through nimble supply-chain maneuvering, handbag maker Béis is experiencing no additional delays in production, according to Adeela Hussain Johnson, president of the travel accessories brand.
Both the company’s factories and the mills that supply the materials for its products were producing and delivering what they promised, she said.
But now, Johnson is worried about the impact on travel, as well as Béis’ ability to deliver customers’ orders to their doorsteps—another kind of supply chain issue.
“Up until last week, I was cautiously optimistic,” she said, referring to the company’s supply chain. But the decline in the stock market and the general reaction to the coronavirus outbreak, just as peak travel season is approaching, ultimately has her concerned about whether consumers will be in the buying mood.